NADA Study: 3,800 stores could disappear in U.S. by 2020
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Study: 3,800 stores could disappear in U.S. by 2020

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Dealers considering whether to plan their succession now should know this: Manufacturers are looking to consolidate the dealer body.

A study by Roland Berger Strategy Consultants says the U.S. dealer network is not sustainable, and 3,800 stores -- just over one in every five outlets -- could close by 2020 if ownership is not consolidated into fewer and larger dealership groups.

Roland Berger is advising automaker clients to take a more direct approach to shaping consolidation.

In essence, the consulting firm argues that consolidation will happen, and automakers can help it to be an orderly reduction in owners. Or they can leave the consolidation to survival of the fittest, with a greater chance that outlets will close, possibly in locations that the factories wanted to keep open.

Automakers can get stronger retail performance from fewer, better and bigger partners, the Roland Berger study argues. But dealers oppose any manufacturer-driven reduction in their ranks.

"The challenge for the manufacturers here is, how can you make those guys sell and understand it's better for them to sell," said Thomas Wendt, a Roland Berger partner. "This is really the big, big thing the manufacturers need to think about, and they need to get right."

At the end of 2012 there were 17,760 U.S. dealerships, down 1 percent from a year earlier, the Automotive News Data Center says. The count has been relatively stable the last few years after big drops in 2008, 2009 and 2010.

Roland Berger already is working with some automaker clients to put in place better performance management systems that can be used to keep a close watch on store metrics. A red-yellow-green rating system is one approach.

Manufacturers must then do a better job of helping dealerships improve, Wendt said. They also need to strengthen their systems for documenting shortfalls by dealerships and communicating that information to the dealers.

"You have regular talks about when a dealer is in a red zone, when are they in the yellow zone, are they fulfilling their targets or not," Wendt said. "So you have clear evidence if it, at the end, comes to court."

He estimates that the number of dealer partners -- not the number of stores -- could be reduced by up to 50 percent with such an approach. Dealers that improve their performance could become buyers, while the manufacturer could help find buyers for the others.

Key findings
1. 3,800 outlets at risk for closure by 2020 without consolidation
2. If no consolidation, dealer profit margins will fall from today's 2.2% to 0.8%
3. If multistore groups acquire one additional store, only 5% reduction in outlets would be required to maintain current margins
4. Consolidation saves average dealership 12% on expenses of $4.4 million per year
Source: Roland Berger Strategy Consultants

Consolidation would make remaining dealers stronger financially, Roland Berger argues. Despite the heady profits most dealerships are posting today, dealer margins will collapse during the next several years without consolidation of ownership, Wendt says.

In 2012, the last full year for which data are available, the average U.S. dealership posted a pretax profit margin of 2.2 percent, according to the National Automobile Dealers Association. That margin would sink to around 0.8 percent by 2020 if nothing changes, Wendt said.

But if each existing multistore dealership group were to acquire one additional stand-alone franchise, only a 5 percent reduction in outlets would be required to maintain current profit margins, Roland Berger says.

Dealers who own one or two stores in metro areas are most at risk, Wendt said. They lack the deep pockets of a larger group and miss out on the cost savings in back-office functions that can be squeezed out of several stores.

But dealers oppose a direct role by the manufacturers in shaping consolidation.

"We have to represent all the dealers in this country," said NADA Chairman David Westcott, a Buick-GMC dealer in Burlington, N.C. "I'm not sure where anybody's in favor of eliminating any of our members."

Manufacturers already give performance reviews to dealers and push for buy/sells behind the scenes, Westcott said.

"It is pretty difficult for the manufacturers, because of franchise laws, to get rid of dealers," he said. "It's a fine line."

You can reach Amy Wilson at awilson@crain.com.


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